Becton Dickinson’s estimated fair value is US$294 based on 2 Stage Free Cash Flow to Equity
Becton Dickinson is estimated to be 22% undervalued based on current share price of US$231
Our fair value estimate is 5.5% higher than Becton Dickinson’s analyst price target of US$279
How far off is Becton, Dickinson and Company (NYSE:BDX) from its intrinsic value? To answer this question, we’ll dive into a discounted cash flow (DCF) analysis, which will help us estimate the company’s fair value.
Discounted Cash Flow Analysis
The DCF model is a widely used financial tool that estimates a company’s intrinsic value by discounting future cash flows to their present value. The process involves several steps:
- Estimate future cash flows: We’ll start by estimating Becton Dickinson’s future cash flows, including revenue growth rates and operating expenses.
- Discount the cash flows: We’ll use a discount rate (cost of equity) to discount the estimated cash flows to their present value.
- Calculate terminal value: Once we’ve estimated the company’s future cash flows, we’ll calculate its terminal value using the perpetual growth model or the residual income model.
- Estimate total equity value: The sum of the discounted cash flows and the terminal value will give us an estimate of Becton Dickinson’s total equity value.
Assumptions
The DCF analysis is highly dependent on two key assumptions:
- Discount rate (cost of equity): We’ll use a cost of equity of 7.1%, which is based on a levered beta of 1.083.
- Cash flows: Our estimates for future cash flows will be crucial in determining the company’s fair value.
Results
Based on our DCF analysis, we estimate Becton Dickinson’s total equity value to be around US$85 billion. Dividing this by the number of shares outstanding gives us a price-to-earnings (P/E) ratio of approximately 22%, indicating that the company appears undervalued compared to its current share price.
SWOT Analysis for Becton Dickinson
A SWOT analysis is a strategic planning tool used to identify a company’s strengths, weaknesses, opportunities, and threats. Here are some key points from our analysis:
Strengths
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- Dividends are covered by earnings and cash flows.
Weaknesses
- Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market.
Opportunities
- Annual earnings are forecast to grow for the next 3 years.
- Trading below our estimate of fair value by more than 20%.
Threats
- Debt is not well covered by operating cash flow.
- Annual earnings are forecast to grow slower than the American market.
Conclusion
Our DCF analysis and SWOT analysis indicate that Becton Dickinson appears undervalued at a price-to-earnings (P/E) ratio of approximately 22%. However, it’s essential to remember that this is just one aspect of building an investment thesis. We’ll discuss the potential risks associated with investing in the company and provide additional insights on future earnings growth and high-quality alternatives.
Additional Insights
Risks
- We’ve flagged two warning signs for Becton Dickinson (1 is potentially serious!) that investors should assess before making a decision.
- Investors may also want to consider the potential cyclicality of the industry and the company’s future capital requirements.
Future Earnings Growth
- How does BDX’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Investors can also explore other high-quality stocks on our interactive list to get an idea of what else is out there.
Conclusion
In conclusion, Becton Dickinson’s estimated fair value is around US$294 based on a 2-stage DCF model. The company appears undervalued at a price-to-earnings (P/E) ratio of approximately 22%, but investors should also consider the potential risks and future earnings growth prospects.
Note: This article by Simply Wall St is general in nature and not intended to be financial advice. It’s essential to conduct your own research and consult with a financial advisor before making any investment decisions.
